Projected Inflation

First, let’s look at inflation, specifically the consumer price index for all urban consumers (CPI-U). I chose this index since it focuses on a typical market basket of goods and services consumed by all urban consumers. In the August 2010 Budget and Economic Outlook, published by the Congressional Budget Office (CBO), it offers a very mild outlook for inflation. The CBO is projecting the CPI-U for 2010 to be 1.6%, 1.0% in 2011, 1.7% in 2012-2014 and 2.3% 2015-2020.

Economic Growth

The mild inflation could be the result of a slow recovery. As for economic growth the CBO offered this:

In the past, many recoveries from deep recessions have been quite robust. After deferring purchases during a slump (especially for expensive goods like homes, automobiles, and capital equipment), households and businesses typically boost their spending quickly as economic prospects improve. However, international experience suggests that recoveries from recessions that were spurred by financial crises tend to be slower than average—perhaps because the losses in wealth and damage to the financial system that occur during such crises weigh on spending for a number of years. Following such a crisis, it takes time for consumers to rebuild their wealth, for financial institutions to restore their capital bases, and for nonfinancial firms to regain the confidence required to invest in new plant and equipment; all of those forces tend to restrain spending. In addition, under current law, both the waning of fiscal stimulus and the scheduled increases in taxes will temporarily subtract from growth, especially in 2011.

D4L-Inflation

With the above back-drop, I created an Excel model to compare a dividend growth stock to inflation. The model is simple to use. It has the following inputs:

Symbol: The dividend growth stock’s ticker symbol
Current Year: This year (2010)
Current Yield: The dividend growth stock’s current yield
Dividend Growth: The dividend growth stock’s estimated dividend growth rate
Inflation Rate: Estimated inflation rate

The Interpretative Analysis section calculates the net present value (NPV) of the annual differential between the dividend income investment and inflation (discounted at the inflation rate). The break-even button next to the Inflation Rate input field will calculate the inflation rate where the dividend stock investment equals inflation. Let’s run some numbers:

It is interesting to note that just a little dividend growth goes a long ways. One other consideration is taxes. To run the calculations on an after tax basis, simple enter the dividend yield on an after-tax basis. For example, if  the dividend yield is 4% on a pretax basis and your marginal tax rate is 30%, then enter 2.8% as the dividend yield (4% x (100%-30%)).

You can download D4L-Inflation.xls and be prepared for the next time someone tells you that dividend stock is not even covering inflation. Just ask them what is their projected inflation rate and the stocks projected dividend growth rate.

Full Disclosure: Long WMT, GD, CL, KO, JNJ, KMB. See a list of all my income holdings here.

Related Posts
- Increasing Dividend Yield Part III: Preferred Stock
- When To Sell A Dividend Stock
- Bonds: The Next Bubble to Burst?
- Searching the World For The Best Dividend Stocks
- Protecting Your Dollars With Foreign Currency

(Photo Credit)

This week a several companies answered the call and rewarded their shareholders with higher cash dividends:

CMS Energy (CMS) is the largest utility in Michigan and the sixth largest gas and 13th largest electric utility in the U.S. January 29th the company increased its quarterly dividend to $0.15/share. The dividend is payable Feb. 26, 2010 to shareholders of record on Feb. 8, 2010. The ex-dividend date is February 4, 2010. The yield based on the new payout is 3.91%.

HCP (HCP) holds direct and joint venture investments in health care-related facilities across the U.S. February 1st the company increased its quarterly dividend to $0.465/share. The dividend will be paid on February 23, 2010 to stockholders of record as of the close of business on February 11, 2010. The ex-dividend date is February 9, 2010. The yield based on the new payout is 6.36%.

Source Capital (SOR) is a diversified closed-end management investment company. February 1st the company boosted its quarterly dividend 20% to $0.60/share. The dividend is payable Mar. 15, 2010, to shareholders of record as of the close of business Feb. 19, 2010. The yield based on the new payout is 5.65%.

Hershey (HSY) is a major producer of chocolate and confectionery products. February 2nd the company increased its quarterly dividend to $0.32/share. The dividend is payable March 15, 2010, to stockholders of record February 25, 2010. The yield based on the new payout is 3.45%.

L-3 Comm (LLL) is a provider of intelligence, surveillance, and reconnaissance systems. February 2nd the company raised its quarterly dividend to $0.40/share. The dividend is payable on March 15, 2010 to shareholders of record at the close of business on March 1, 2010. The ex-dividend date is February 25, 2010. The yield based on the new payout is 1.84%

Unitrin (UTR) provides property and casualty insurance, life and health insurance, and automobile finance services. February 3rd the company boosted its quarterly dividend 10% to $0.22/share. The dividend is payable on March 1, 2010 to its shareholders of record as of February 12, 2010. The ex-dividend date is February 10. The yield based on the new payout is 3.86%

News Corp (NWS) is a media conglomerate, with controlling interests in leading content and distribution assets across the globe, including Fox Entertainment. February 3rd the company increased its semi-annual dividend 25% to $0.075/share. The dividend is payable on April 14, 2010 with a record date for determining dividend entitlements of March 10, 2010. The ex-dividend date is March 8, 2010. The yield based on the new payout is 0.94%

Ross Stores (ROST) is an off-price retailer providing in-season branded apparel and other merchandise through over 1,000 stores in 27 states and Guam. February 4th the company raised its quarterly dividend 45% o $0.16/share. The dividend is payable on March 31, 2010 to stockholders of record as of February 19, 2010. The ex-dividend date is February 17, 2010. ROST is a Dividend Achiever and has raised its dividend for 16 consecutive years. The yield based on the new payout is 1.41%.

AGL Resources (AGL) is an energy services holding company provides natural gas to about 2.3 million customers. February 4th the company boosted its quarterly dividend 2.3% to $0.44/share. The dividend is payable March 1, 2010, to shareholders of record at the close of business on February 19, 2010. The yield based on the new payout is 5.00%.

PennantPark Investment (PNNT) specializes in direct and mezzanine investments in middle-market companies. February 4th the company increased its quarterly dividend to $0.26/share. The dividend is payable on April 1, 2010 to stockholders of record as of March 25, 2010. The ex-dividend date is March 23, 2010. The yield based on the new payout is 11.60%.

Archer Daniels Midland (ADM) is one of the world’s leading agribusiness companies, with major market positions in agricultural processing and merchandising. February 4the the company raised its quarterly dividend to $0.15/share. The dividend is payable March 11, 2010, to stockholders of record February 18, 2010. The ex-dividend date is February 16. ADM is a Dividend Aristocrat and has raised its dividend for 35 consecutive years. The yield based on the new payout is 2.00%.

Colgate-Palmolive (CL) is a consumer products company markets oral, personal and household care, and pet nutrition products. February 4th the the company boosted its quarterly dividend 20% to $0.53/share. The dividend will be paid on May 14, 2010 to shareholders of record as of April 26, 2010. The ex-dividend date is April 22. On an annual basis, the new dividend rate is $2.03 vs. $1.72 per share previously. CL is a Dividend Achiever and has raised its dividend for 16 consecutive years. The yield based on the new payout is 2.66%.

UPS (UPS) is the world’s largest express delivery company. February 4th the company increased its quarterly dividend to $0.47/share. The dividend is payable March 3, 2010, to shareholders of record on Feb. 16, 2010. The yield based on the new payout is 3.28%.

Hasbro (HAS) is a large toy company has brands that include Monopoly, Playskool and Tonka. February 4th the company raised its quarterly dividend by 25% to $0.25/share. The dividend will be payable on May 17, 2010 to shareholders of record at the close of business on May 3, 2010. The ex-dividend date is April 30. The yield based on the new payout is 3.20%.

J. B. Hunt Transport Services (JBHT) provides truckload, intermodal, and contract carriage services. February 4th the company boosted its quarterly dividend $0.12/share. The dividend is payable to stockholders of record on February 12, 2010. The dividend will be paid on February 26, 2010. The yield based on the new payout is 1.58%.

D&B (DNB) is a worldwide provider of business information and related decision support services and commercial receivables management services. February 4th the company increased its quarterly cash dividend to $0.35/share. This quarterly cash dividend is payable on March 18, 2010, to shareholders of record at the close of business on March 3, 2010. The yield based on the new payout is 1.80%.

To be a true dividend champion, a stock must consistently raise its dividend over more than just a few years. For a list of stocks with a long string of consecutive cash dividend increases, see this list.

Full Disclosure: Long HCP. See a list of all my income holdings here.

(Photo Credit)

Irving Kahn has made a career of finding solid but beaten-down stocks by poring over annual reports and studying balance sheets looking for companies that have lots of cash, not much debt and good long-term growth prospects. He has seen it all, bull markets, bear markets, recessions, recoveries and, unlike most of us, he’s also seen the Great Depression. Born on December 19, 1905, Kahn worked as a stock analyst and brokerage clerk on Wall Street in the 1930s.

Kahn learned from the best. He served as the second teaching assistant to Benjamin Graham at the Columbia Business School. When asked about the Great Depression, he noted that the problem after the Depression was not so much the lack of money to invest but rather “knowing how to use it without losing it. There were too many bargains.” A bargain isn’t a sure thing, and Kahn will only buy investments he deemed “riskless.” Kahn hasn’t deviated from that philosophy over the decades.

Since 1978, Kahn has served as Chairman of The Kahn Brothers Group Inc. The company is a money manager and Registered Investment Advisor. It’s principals manage over $550 million of institutional and private funds. The firm provides money management and brokerage services through its affiliated broker-dealer, Kahn Brothers LLC, which is a member of the New York Stock Exchange.  At 103 years old he still shows up five days a week to hunt for overlooked companies with good businesses and little debt that are trading for less than the value of their assets. He is quoted as saying: “I’m at the stage in life where I get a lot of pleasure out of finding a cheap stock,” adding that his research still pushes him to work evenings and weekends.

Kahn does not believe we are headed for a repeat of the 1930s when people “felt so helpless.” As an investor who has seen dozens of economic downturns, Kahn plainly says this is just part of the natural cycle of the market. “Investors have no reason to feel bearish. True value investors are glad the markets are down.”

Then, like now, there will be companies that survive and eventually thrive. Consider these stocks that not only survived the 1929 crash, but went on to reach new highs within two years:

• Archer-Daniels Midland (ADM) – Yield: 2.18%
• Coca-Cola (KO) – Yield: 3.71% – [Recent Analysis]
• U.S. Steel (X) – Yield: 2.18%
• Deere and Co.  (DE) – Yield: 3.03%
• Macy’s (M) (Formerly Federated Department Stores) – Yield: 4.38%

Unfortunately, we all couldn’t be trained by Benjamin Graham and absorb the deep rooted confidence he had in his investing philosophy, but through knowledge, time and experience we can build the needed confidence in our own investing process. Abby Joseph Cohen, a partner and chief U.S. investment strategist at Goldman, Sachs & Co. during the Squawk Financial Summit aired that on CNBC March 24 said, “There hasn’t been a recession yet that hasn’t ended.” Value investors like Kahn, Buffett and others are betting this one won’t be any different.  My money is with them.

Full Disclosure: Long KO

References:
- Stock Pros Who Survived the Depression
- Wikipedia
- Kahn Brothers Group, Inc.
- The Stocks That Survived 1929

Here are several companies rewarding their shareholders with higher cash distributions through increased dividends:

• HCP (HCP) Raises Qtr. Dividend 1% to $0.46/share (8.00% yield)
• Aqua America (WTR) Bumps Quarterly Dividend 8% to $0.135 (2.57% yield)
• Avon Products (AVP) Increases Dividend 5% (3.86% yield)
• Black Hills Corp. (BKH) Raises Qtr. Dividend (5.97% yield)
• Infinity Property and Casualty (IPCC) Bumps Dividend to $0.12/share (1.22% yield)
• Ross Stores (ROST) Increases Qtr. Dividend by 16% to $0.11/share (1.24% yield)
• J.B. Hunt Transport (JBHT) Boosts Qtr Dividend 10% to $0.11 (1.64% yield)
• Archer Daniels Midland (ADM) Bumps Quarterly Dividend (1.95% yield)
• L-3 Communications (LLL) Raises Qtr. Dividend by 17% to $0.35, (1.51% yield)

Retirement is not when you want to start learning how to dividend invest. There is a degree of art to dividend investing. Start young, time is always a great ally.

Full Disclosure: Long HCP

(Photo: Steve Woods)